Contents
Market Overview
Macro Review
The keenly anticipated U.S. non-farm payrolls number on Friday indicated that the economy added fewer jobs than expected in August and the two prior months’ numbers were revised lower. However, the report was mixed, also showing that the headline unemployment number fell on a rounded basis. This will likely keep uncertainty elevated and markets guessing on whether the Federal Reserve will kick off its likely rate cutting cycle by 25 or 50bps on September 18th. Investors who believe further and more tangible signs of U.S. labor market weakness are coming will likely fall in the 50bps camp, while those still unsure if inflation fears have receded completely would probably price in a more cautious Fed at the start of the easing cycle. Boosted by the weaker than expected payrolls and dovish comments by FOMC members on Friday, U.S. treasuries rallied across the curve, with 2Y yields 5-10bps lower in the 3.65% area. In other markets, stocks remained under pressure on concerns that at the end of the day, the Fed might not be successful in its “soft landing” engineering. Major currencies were little changed, with the USD gaining slightly against its main peers. Crude oil continued to slide, with Brent prices falling to below $71 per barrel, the lowest level since 2021.
EM Credit Update
Emerging market sovereign credit (cash bonds) gained 0.3% with spreads flat. Sovereign outperformers were Ukraine, Gabon and India, while Zambia, Kazakhstan, and the Philippines underperformed. Corporate credit was 0.2% higher at the index level with spreads 12bps wider. EM local debt was 0.4% higher.
The Week Ahead
Next week, markets will await ECB’s policy rate decision on Thursday; consensus is for a 25bps cut to 3.5% and forward guidance toward remaining on a gradual easing path. U.S. headline and core inflation prints for August are due to be released on Wednesday and will contribute to the Fed rate cut size debate. In EM, data on inflation dynamics in Brazil, Argentina, Mexico and South Africa, among others is due. Also in Mexico, markets will continue to follow closely the judicial reform’s approval process that is highly likely to progress through the legislative steps.
Highlights from emerging markets discussed below: Turkey’s medium-term economic program signals continued macro normalization; Mexico judicial reform passes in Lower House; Government reshuffle in Ukraine carries little relevance for markets; and Ghana launches exchange offer in line with agreed to principal terms.
Fixed Income
Equities
Commodities
Source for data tables: Bloomberg, JPMorgan, Gramercy. EM Fixed Income is represented by the following JPMorgan Indicies: EMBI Global, GBI-EM Global Diversified, CEMBI Broad Diversified and CEMBI Broad High Yield. DM Fixed Income is represented by the JPMorgan JULI Total Return Index and Domestic High Yield Index. Fixed Income, Equity and Commodity data is as of September 6, 2024 (early-morning).
Emerging Markets Weekly Highlights
Turkey’s medium-term economic program signals continued macro normalization
Event: The Turkish Government unveiled the latest iteration of its medium-term economic program (MTP), forecasting lower economic growth and targeting narrower fiscal and current account deficits.
Gramercy Commentary: From our perspective, the main signal from the updated MTP, presented this week by Vice President Cevdet Yilmaz, alongside Minister of the Economy and main architect of the program Mehmet Simsek and CBT Governor Fatih Karahan, is that commitment to disinflation remains intact at the cost of tolerating lower economic growth and a tighter fiscal policy stance. Critically, the program appears to enjoy the explicit political support of President Erdogan, as highlighted by his deputy, Mr. Yilmaz, a key signpost for us. All of this is good news for markets that should continue to price in a material disinflation trajectory for the rest of 2024 and into 2025, supporting local currency assets ahead of a credit positive rate-cutting cycle that we expect to materialize in late 4Q or by 1Q 2025 at the latest.
Mexico judicial reform passes in Lower House
Event: The Lower House approved the controversial judicial reform, which allows for election of judges by popular vote, with 357 votes in favor and 130 votes against. The MXN depreciated in the aftermath briefly touching 20 pesos per USD.
Gramercy Commentary: We expect ultimate approval of the judicial reform this month as outgoing President Andres Manuel Lopez Obrador (AMLO) pushes through his agenda ahead of the inauguration of newly elected President Claudia Sheinbaum on October 1st. Passage of this reform as well as prospects for elimination of key regulatory bodies poses risks to institutions and increases legal uncertainties over the medium term. This combined with U.S. election risk and rate cuts will likely keep peso volatility elevated in the coming weeks and months. Thereafter, the focus will shift to Sheinbaum’s policy approach, implementation of the reform agenda, and consolidation plans in the 2025 budget.
Government reshuffle in Ukraine carries little relevance for markets
Event: This week, Ukraine’s President Volodymyr Zelensky requested the resignations of four Ministers from the country’s Cabinet, including that of Foreign Affairs Minister Dmytro Kuleba. Parliament ratified the dismissals and Kuleba was replaced by his deputy, Andriy Sybiha, a former ambassador to Turkey.
Gramercy Commentary: Despite the headline grabbing nature of this development, we believe that it has limited relevance from a market perspective. We do not expect any major policy changes to be driven by the reshuffle, nor any changes to Ukraine’s war efforts in the coming months. While Mr. Kuleba was the “face” of Ukraine’s diplomatic efforts in the West to ensure continuation of military and financial support and bring the country closer to NATO and EU membership, he is being replaced by another experienced and well-respected diplomat. NATO and/or EU membership remain a remote possibility even on a long-term horizon, in our view. Beyond the noise surrounding the cabinet reshuffle, the far more important dynamic for Ukraine’s credit trajectory is another very challenging winter on the horizon and no tangible prospects for conflict resolution any time soon.
Ghana launches exchange offer in line with agreed to principal terms
Event: The Government announced a comprehensive exchange offer and consent solicitation exercise for its roughly $13bn of Eurobonds. Bondholders are invited to exchange their notes for new ‘Disco’ bonds and ‘Par’ bonds as well as PDI and consent fee bonds. ‘Disco’ bond terms entail at 37% haircut with a short-term bond which matures in 2029 and a long-term bond which matures in 2035. The coupon on the ‘Disco’ bonds is 5% and steps up to 6% in 2028. The short-term ‘Disco’ bond begins to amortize in 2026 while the long-term ‘Disco’ bond begins to amortize in 2030. The ‘Par’ bond matures in 2030 with a coupon of 1.5% and capped at $1.6bn. The early consent deadline is September 20th, the expiration deadline is September 30th and the settlement date is October 9th.
Gramercy Commentary: The completion of the final stages of the restructuring process is constructive and in line with previously agreed to terms in principal. The timeline for the overall process has been comparatively swift albeit moderately later than originally anticipated. Once finalized with bonds out of the box, investors will shift their focus to the next IMF review in November as well as the general election on December 7th. While there is room for noise, we do not envisage significant changes to policy or the existing IMF program.
Emerging Markets Technicals
Emerging Markets Flows
Source for graphs: Bloomberg, JPMorgan, Gramercy. As of September 6, 2024.
For questions, please contact:
Kathryn Exum, CFA ESG, Director, Co-Head of Sovereign Research, [email protected]
Petar Atanasov, Director, Co-Head of Sovereign Research, [email protected]
James Barry, Director, Deputy Portfolio Manager, [email protected]
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